What Does the Federal Reserve’s “Beige Book”

What Does the Federal Reserve’s “Beige Book” Reveal About the State of the U.S. Economy in the Coming Period?

Economic growth is starting to slow down in more sectors, and the growth outlook for the next six months is expected to face uncertainty due to upcoming elections, geopolitical conflict, and inflation, according to the Beige Book released by the Federal Reserve on Wednesday.

 

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The report added

 

 

 

 

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The Federal Reserve said in its economic report, the “Beige Book,” which is based on narrative information gathered by 12 Federal Reserve Banks up until July 8:

“The outlook for the economy suggests a slowdown in growth over the next six months due to uncertainty regarding the upcoming elections, domestic policy, geopolitical conflict, and inflation.”

 

The report added that the weaker outlook comes as most sectors in this report indicated a modest growth pace, but five of them pointed to “stable or declining activity—up from three banks compared to the previous reporting period.”

 

In a sign of further cooling in the labor market, the report noted that several sectors saw some improvement in labor supply conditions with a decrease in labor turnover, reducing the demand for finding new workers.

 

 

 

 

The report added

“Looking ahead, contacts in many sectors expect to be more selective in who they hire and not fill all vacant positions.”

 

The labor market has become a growing focus in recent weeks after Federal Reserve Chairman Jerome Powell indicated a slight shift in the central bank’s focus towards easing in the labor market instead of focusing solely on inflation.

 

Meanwhile, the pace of inflation was modest, as the Beige Book showed that “most sectors indicated that input costs have begun to stabilize.”

 

 

What Does the Federal Reserve’s “Beige Book”

 

The Fed Drives Gold Down Changing Expectations Shape the Scene

The Fed Drives Gold Down Changing Expectations Shape the Scene

Gold prices saw a significant drop on Thursday as traders digested the Federal Reserve officials’ updated interest rate outlook, indicating only one rate cut for this year.

 

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Powell’s Remarks

Gold Settlement on Wednesday

 

 

 

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On Wednesday, the Federal Reserve kept interest rates unchanged while signaling
that policymakers expect only one rate cut in 2024.
Lower interest rates reduce the opportunity cost of holding non-yielding bullion.

 

 

 

 

Powell’s Remarks

Federal Reserve Chairman Jerome Powell noted that the Fed’s inflation outlook is “somewhat conservative” and may not be supported by incoming data, thus subject to revision. Powell stated that rushing to lower interest rates in the U.S. “could have significant implications for inflation.”

 

Following the Federal Reserve’s decision to maintain interest rates steady for the seventh consecutive time on Wednesday, Powell explained that he expects the interest rate to stay at 5.1% through the end of this year, with a decline to 4.1% next year. He emphasized the Federal Reserve’s commitment to working towards price stability, anticipating continued inflationary pressures in the U.S. economy over the next two years.

 

Powell also highlighted the potential for the U.S. Consumer Price Index (CPI) to rise more than expected this year. He added, “We will continue to work to ensure that inflation returns to its 2% target.” On a positive note, the Fed Chairman acknowledged that the CPI data released yesterday, which was better than expected, was a welcome development for the Federal Reserve officials.

 

May Consumer Price Index (CPI)

The main CPI remained flat month-on-month in May, contrary to expectations of a 0.1% increase. Core prices rose by 0.2%, which is also below economists’ forecasts of a 0.3% increase.

According to data from the U.S. Department of Labor, the annual CPI rate in the United States was 3.3% in May, down from 3.4% in April, against expectations for it to remain unchanged.

 

 

 

 

 

 

Gold Settlement on Wednesday

Gold futures prices bolstered their gains during Wednesday’s trading after
the unexpected slowdown in U.S. consumer prices, fueling hopes for a rate cut this year.

At settlement, gold futures for August delivery increased by 1.2%, or $28.2, to $2,354.8 per ounce.

 

 

The Fed Drives Gold Down Changing Expectations Shape the Scene

 

Upcoming Presidential Elections Will Not Affect U.S. Interest Rates

Upcoming Presidential Elections Will Not Affect U.S. Interest Rates:

On Wednesday, U.S. Federal Reserve Chair Jerome Powell confirmed that the upcoming U.S. presidential elections will not influence the bank’s decisions regarding interest rates. Powell pointed out that policymakers are unanimous in keeping political factors out of the decision-making process, emphasizing that the bank’s decisions are driven by “what we believe is the right choice for the economy.” With this, Powell reasserts the bank’s consistent stance of disregarding politics in its economic analysis and decision-making process.

 

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Interest Rates

Market Reaction

 

 

 

 

 

Interest Rates

U.S. Interest Rates Remain Unchanged:

The U.S. Federal Reserve kept the overnight interest rates unchanged on Wednesday, within the range of 5.25-5.50 percent. The bank indicated that it still leans towards eventually lowering borrowing costs, but recent high inflation readings currently prevent this and suggest a possible pause in moving towards further economic balance.

 

Federal Reserve Chair Jerome Powell stated that it is likely to take longer than previously expected for U.S. central bank officials to gain “a greater degree of confidence” to begin reducing interest rates.
Powell added during a press conference after the two-day Federal Open Market Committee monetary policy meeting, “Inflation is still too high… Any further progress in curbing inflation is not assured, and the path ahead is murky.”

He continued, “Gaining greater confidence is likely to take longer than previously expected.”

 

 

 

 

 

Market Reaction

How the Market Reacted to the Fed’s News:

Spot gold prices saw an increase of more than 1.5% amid statements by the U.S. Federal Reserve Chair.
The price of gold futures rose by 1.25% to $2331.75 per ounce.

Silver prices also increased by 1.53% to $27.065 per ounce. Meanwhile,
the Dollar Index fell by 0.29% to 105.795 against a basket of foreign currencies.

Treasury bond yields experienced a sharp decline following the Fed’s decision to slow the pace of asset purchase reductions.
Two-year Treasury yields dropped by 1.83% to 4.954%,
and ten-year Treasury yields also decreased by 1.34% to 4.624%.

All Wall Street indices are currently on the rise,
with the Dow Jones Industrial Average increasing by 1.23% to 38,281 points,
Nasdaq by 1.44%, and the S&P 500 by 0.84%.

Bitcoin minimized its losses and rose above the $58,000 level,
currently trading at $58,388.5, while Ethereum rebounded and is now trading at $2966.

 

 

 

Upcoming Presidential Elections Will Not Affect U.S. Interest Rates

What are the expectations for the upcoming meeting

What are the expectations for the upcoming meeting of the Federal Reserve’s monetary policy committee?

The Federal Reserve needs to be confident in preventing runaway inflation.

The Federal Open Market Committee, the policy-making body of the central bank, is likely to leave the federal funds rate unchanged when it concludes its two-day meeting on Wednesday.

 

 

 

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All eyes are on comments about recent data.

 

 

 

 

 

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The Federal Reserve is likely to send a message that it plans to continue pressuring inflation and the economy with higher interest rates for a longer period until inflation is under control.

The Federal Reserve’s battle against inflation has been at a stalemate throughout the year. In contrast, hopes for interest rate cuts in the coming months have diminished.
The Federal Reserve has maintained the benchmark interest rate at a range of 5.25% to 5.5% since July.

This is the highest since 2001 and aims to curb inflation by discouraging borrowing and spending. Instead, consumers have continued to spend and inflation has remained stubborn, according to recent economic data.

Earlier this year, Federal Reserve officials expected they would cut the federal funds rate three times as inflation slowed. Financial markets were expecting these cuts to begin in June. However, after three consecutive months of inflation reports exceeding expectations, traders are now pricing September as the first month for the first cut, according to the CME Group’s FedWatch tool, which tracks the likelihood of interest rate movements based on federal funds futures.

 

 

 

 

All eyes on comments about recent data

Given the Federal Reserve officials’ comments in recent weeks, a rate cut at the May meeting would be a big surprise, so all eyes will be on the statements surrounding the decision.

In addition to the Federal Reserve’s statement accompanying the interest rate decision, Federal Reserve Chairman Jerome Powell will provide remarks and answer questions at a press conference after the meeting.

According to data from private companies, rent increases have stopped accelerating, which would put downward pressure on official inflation measures like the Consumer Price Index. Housing costs are the largest element in the Consumer Price Index and tend to reflect rental data up to a year after actual market changes.

However, with the economy booming and unemployment rates low, there is little pressure on the Federal Reserve to cut interest rates to stimulate the economy and prevent a recession. More pressure exists to keep them high to suppress inflation.

 

 

 

What are the expectations for the upcoming meeting

Treasury yields remained steady ahead of the release of GDP data in the United States

Treasury yields remained steady ahead of the release of GDP data in the United States

which will determine the outcomes of the inflation report.

They were stable on Thursday before the U.S. GDP data, which will also provide a reading on inflation in the first quarter.

 

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What’s happening

What’s driving the markets

 

 

 

 

 

What’s happening

  • The two-year Treasury bond yields remained steady at 4.93%.
  • The ten-year Treasury bond yields also changed little, standing at 4.65%.
  • The thirty-year Treasury bond yields rose by one basis point to 4.78%.

 

 

 

 

What’s driving the markets

On Wednesday, the ten-year bond yield increased by six basis points, marking its biggest weekly rise. The first quarter GDP data is expected at 15:30 Saudi time, and is anticipated to show a 2.2% growth. The GDP reports also contain quarterly personal consumption expenditures inflation data, which economists can use as a guide for the March figures expected to be released on Friday. If the annualized inflation rate for Q1 personal consumption expenditures is 3.42%, the data suggest a monthly rate of 0.3% for March, assuming there are no revisions for January or February. Figures of 3.4% indicate a 0.2% rate for core personal consumption expenditures inflation, while a rate of 3.55% suggests a 0.4% monthly rate.

 

 

 

 

The Federal Reserve and Continued Inflation Expectations

The Federal Reserve and Continued Inflation Expectations

According to the latest survey conducted by the Federal Reserve, there is an indication that continued inflation and the possibility of prolonged high interest rates pose significant risks to the stability of the financial system.
The survey includes opinions from market participants, academics, and other contacts, and also points to geopolitical issues and the upcoming 2024 U.S. presidential elections as potential sources of economic shocks.

 

 

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Inflation

The semi-annual survey was released on Friday as part of the Federal Reserve’s financial stability report. It aims to analyze leverage, risk, and other economic factors to identify potential points of disruption. Despite the strong increase in interest rates that began more than two years ago to combat inflation, the report indicates that the financial system has not yet been exposed to widespread risks. However, the resilience of the financial sector poses a challenge to Federal Reserve officials who are trying to slow down the economy to achieve the central bank’s target inflation rate of 2%.

 

 

 

 

Bitcoin

Bitcoin Halving on Last Friday:

The Bitcoin halving event, a significant occurrence in the cryptocurrency world, concluded last Friday, April 19. Additionally, BTC mining rewards were reduced from 6.25 BTC to 3.125 BTC. This event drew wide interest from various personalities in trading and investing, emphasizing the increasing scarcity of Bitcoin, considering it one of the toughest forms of currency in the world. With this halving, Bitcoin production will increase by only 0.85% annually, making it rarer than gold.

 

 

 

 

Oil

Oil records weekly losses close to 4%: West Texas Intermediate crude futures settled above $83 per barrel on Friday, recovering from previous losses, after Iran downplayed the significance of an Israeli attack on its territory, indicating it had no plan for retaliation. In a retaliatory move early on Friday, Israel launched a strike, leading to the interception of three drones by the Iranian air defense system over the city of Isfahan. Traders were tense in anticipation of Israel’s response to last weekend’s aggression, with tensions exacerbated by Iran’s warnings of attacks on its nuclear sites. Additionally, the United States imposed new sanctions on Thursday targeting 16 individuals and entities linked to Iran’s drone program. This measure is part of the U.S. efforts to retaliate against Iran for its recent attack on Israel. The European Union is also considering imposing new restrictions on Iranian oil. Brent crude fell about 4% during the week, after a 0.7% drop in the previous period.

 

The Federal Reserve and Continued Inflation Expectations

Has the Federal Reserve succeeded in overcoming inflation?

Two years ago, in March 2022, the Federal Reserve began raising the interest rate, which currently stands at 5.50%, in an effort to combat high inflation rates.

How have the economic and financial data reacted to this from that time until now?

 

 

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Why is the Federal Reserve delaying the start of interest rate cuts

 

 

 

 

 

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  • The inflation rate initially rose to 9% then gradually decreased to 3.2%.
  • The unemployment rate did not change but remained within the range of 3.4% to 3.9%.
  • The wage growth rate decreased from 5.6% to 4.1%.
  • The Reserve’s assets decreased from $9 trillion to $7.4 trillion.
  • Economic growth increased from 1.8% to 3.1% (on an annual basis).
  • Residential property prices fluctuated, first rising by 5%, then decreasing by 4.4%, before rising again to 6.8% and remaining at that level.
  • The yield on 10-year Treasury bonds increased from 1.78% to 4.31%.
  • Stocks (Dow Jones Index) rose by about 17% and (S&P 500 Index) by about 16%.

Can we say that the Federal Reserve has succeeded in reducing the inflation rate through interest rate hikes and quantitative tightening?

Last week, Federal Reserve member “Austin” stated that inflation is still ravaging the American economy, especially housing inflation.

He also continued that if inflation remains at this level, the Federal Reserve will not lower the interest rate at all this year.

 

 

 

 

Why is the Federal Reserve delaying the start of interest rate cuts?

Because the interest rate is at its highest level of 5.5% and the markets are anticipating the start of the interest rate cutting process. However, the good economic numbers, such as low unemployment and the availability of 300,000 jobs, add inflationary pressures and make inflation sticky (cohesive). This forces the Federal Reserve to delay the interest rate cutting process or might even raise it again, which is currently the market’s fear. Because when that happens, it could suffocate the economy, leading to rising unemployment and potentially causing a recession.

Yesterday, Neil Kashkari, the president of the Minneapolis Federal Reserve, became the first member of the Federal Open Market Committee (FOMC) to “dare” to indicate that the US central bank, given the strength of the economy and the labor market and the reluctance of inflation to decrease, might not cut the benchmark interest rates in 2024.

The markets are awaiting the inflation figures later this week through the Consumer Price Index.

 

 

 

Several central meetings last week and important decisions

Several central meetings last week and important decisions

The US dollar experienced a sharp increase in trading at the end of last week,
after the Federal Reserve set interest rates at 5.5% as expected.
On the other hand, the Swiss National Bank delivered a big surprise in a week full of central bank meetings
by lowering interest rates and indicating that strengthening the Swiss Franc was a reason for this.

 

 

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The Swiss Franc

the Bank of England

 

 

 

 

 

 

The Swiss Franc

The Swiss Franc, which had been the best performer in the G10 group in 2023, declined by more than 1%,
continuing to fall on Friday as the USD/CHF pair rose by 0.4% to 0.9000, approaching parity.

 

This decision led traders to reassess the potential future actions of the Federal Reserve after last week’s Federal Open Market Committee meeting,
where officials once again highlighted the possibility of cutting interest rates three times this year if economic data supports it.

 

The US central bank significantly raised its growth expectations for 2024,
and data last Thursday showed that the US economy remains strong,
with unexpected declines in unemployment claims and previously owned home sales in February reaching their highest level in a year.
These signs indicate that the Federal Reserve is not in a hurry to cut interest rates in the future.

 

 

 

 

 

 

 

the Bank of England

On the other hand, the Bank of England kept interest rates unchanged on Thursday,
but two members of the Monetary Policy Committee withdrew their stance on the need to raise interest rates to combat falling inflation.

 

Bank of England Governor Andrew Bailey stated that expectations of interest rate cuts this year were “not unreasonable”.

 

In Europe, the president of the German central bank, Joachim Nagel,
stated on Friday that the European Central Bank might be in a position to cut interest rates before the summer holiday,
possibly in June, as inflation is expected to return to the central bank’s target of 2%.

 

Nagel’s statements make him join a long list of policymakers who clearly support an interest rate cut in June,
indicating that the European Central Bank would be the second major central bank to start cutting interest rates after the Swiss National Bank,
which had already begun a series of interest rate hikes.

 

 

 

Several central meetings last week and important decisions

Federal Meeting Expectations and Anticipated Market Impacts

Federal Meeting Expectations and Anticipated Market Impacts

It is widely expected that the Federal Reserve, in its meeting scheduled for today,
March 20, 2024, will maintain the key lending rate unchanged.
In this context, committee members continue to discuss strategies to curb and combat inflation,
focusing on the timing of interest rate cuts and the implementation of the next phase of monetary policy.

 

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The Federal Reserve had taken significant steps to raise interest rates to their highest levels in 23 years,
between 5.25% and 5.50%, aiming to return to the targeted 2% inflation rate.
Despite progress made in fighting inflation last year, increased challenges have been highlighted by inflation data,
making the committee’s upcoming estimates crucial.

 

The consumer price inflation rate will be crucial in the next meeting,
as Federal Reserve members will discuss the possibility of reducing interest rates,
in addition to determining the number of possible cuts in the current monetary policy.

 

However, we do not expect a significant change,
although some analysts speculate a reduction in the anticipated number of interest rate cuts this year.
Decision-makers are expected to lower their expectations for interest rate cuts more than they expect to raise interest rates again.

 

Moreover, the Federal Reserve’s upcoming decision on interest rates is eagerly awaited,
and Federal Reserve Chairman Jerome Powell’s statement on monetary policy will be a key focus for investors’ future guidance.

 

Following the European Central Bank’s recent decision, the Federal Reserve is expected to commit to not changing interest rates,
barring any unforeseen developments.

It is highly likely that the Federal Reserve will postpone interest rate hikes in the next meeting,
as expectations indicate a relative increase in probability from last week, now at 100%.

 

 

Here’s what different asset classes might indicate about what Powell might say:

  • Two-year U.S. yields: An increase indicates the market’s impatience with a prolonged period of high-interest rates.
  • EUR/USD currency pair: A more dovish outlook and potential interest rate cuts could weaken the U.S. dollar.
  • Small company stocks: An increase in the Russell 2000 index may indicate expectations for an interest rate cut.

However, it’s important not to assume anything, as Federal interest rate cuts in 2024 are not guaranteed.

 

 

 

 

Federal Meeting Expectations and Anticipated Market Impacts

 

What did the labor market data present to the markets

What did the labor market data present to the markets, and will the Federal Reserve begin interest rate cuts?

The U.S. employment data has brought a new surprise to the markets.

 

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The monthly employment report from the U.S. Bureau of Labor Statistics revealed a faster pace of job growth in February than expected,
surpassing the previous reading that was revised downward.
Additionally, the unemployment rate increased, surpassing expectations and the previous reading,
while the average hourly wages rose annually and monthly, but below expectations and the previous reading.

 

The U.S. private sector added 275,000 jobs in February, exceeding experts’ expectations of 198,000,
and the previous reading was 353,000, but it was revised downward to 229,000.
In the non-farm private sector, 223,000 jobs were added in February, compared to the expected 160,000,
and the previous reading was revised downward from 317,000 to 177,000.

 

 

 

 

 

unemployment rate

On the other hand, the U.S. unemployment rate unexpectedly rose to 3.9% in February,
while experts had anticipated a rate of only 3.7%, as seen in the previous reading.
The monthly average hourly wage increased by 0.1% in February, lower than the previous reading of 0.6%,
and it was revised downward to 0.5%, while expectations were for a 0.2% increase.

 

On an annual basis, the average hourly wages recorded a 4.3% increase, slightly below the experts’ expected 4.4%,
with the previous reading at 4.4% after being revised downward from 4.5%.

 

The markets reacted significantly to the released data, with gold strengthening its gains to close last week’s trading at $2179 per ounce.
Meanwhile, the dollar index deepened its losses, closing at 102.7, and the yield on the benchmark 10-year U.S. Treasury bonds fell to 4.07%.

 

The significance of these data lies in the Federal Reserve’s reliance on them to gauge the activity level of the U.S. economy, alongside inflation data.
In its upcoming meeting, the Fed may provide hints and signals about the initiation of monetary stimulus and interest rate cuts.
Following satisfactory inflation data for the monetary policy committee and the disparities revealed by the labor market data,
expectations have risen for the Fed to start the interest rate reduction process in June, reaching 57.4% according to the Fedwatch tool.”

 

 

 

 

 

What did the labor market data present to the markets